November 3, 2011
Dear Client,
Stock market investors could be forgiven for drawing an analogy between today’s 208 point rally in the Dow Jones
Industrial Average and the 1993 hit film Groundhog Day where Bill Murray finds himself repeating the same day over and
over again. In the current rendition Bill Murray’s part would be played by stock market investors, and the setting would be
Athens, Greece rather than Punxsutawney, PA. Thus it was news out of Greece again that drove today’s market surge.
The report that the Greek referendum on the EU bailout package that was announced two days ago has apparently been
canceled under intense political pressure on the Greek prime minister was greeted as the best possible outcome by stock
market investors, helping to recover some of the losses that took place following its announcement. Essentially this takes
us back in time to a couple days ago when the discussion was about whether the measures where sufficient to ensure
that Greece’s debt was sustainable. Clearly, there remain many unknowns, including the outcome of a no-confidence
vote tomorrow that could lead to a new government in Greece who might perhaps seek to renegotiate the agreement with
the EU. At this time the vote remains too close to call. Another, perhaps more important in the longer term,
announcement out of Europe today was the decision by the European Central Bank to cut its benchmark interest rate to
1.25% from 1.5%. There was skepticism among economists that the ECB would cut today given that it was the first
meeting under new president Mario Draghi. Whether this cut represents a more significant shift in ECB policy toward
significant accommodation in light of the crisis remains to be seen. MS&Co economists do not expect additional ECB
easing until early 2012, and only if European growth indicators continue to deteriorate.
In the US, the market was encouraged by economic news indicating that the labor market remains stable. Jobless claims
declined by 9,000 in the week of October 29 to 397,000, the lowest since the week of September 24, and the second
lowest reading since April. This lowered the 4-week average 2,000 to 404,500, also near the lowest level since the spring.
MS&Co. economists expect a 125,000 gain in tomorrow’s October nonfarm payrolls and an uptick in the unemployment
rate to 9.2%.
For the day, all ten S&P 500 sectors finished in the green, led by gains in Energy up 2.5%, Industrials also up 2.5% and IT
up 2.4%. Traditional defensive sectors lagged with Utilities and Healthcare both up 1.2%. Overall the S&P 500 gained 23
points or 1.9%, to close at 1261. The Dow gained 1.8% or 208 points to end the day at 12,044. The tech-heavy Nasdaq
closed at 2,698, up 58 points or up 2.2%.
Since October the US equity market has benefited from a series of generally stronger than expected Q3 earnings results.
Together with the recent spate of better than expected economic data, this seems to have convinced the consensus that
the U.S. economy is no longer on the cusp of recession. However, there may be another element behind the market’s
recent volatility. As of early October, roughly 40% of mutual fund managers were at least 250 basis points behind their
benchmark, with 23% at least 500 basis points behind. Those are unusually high numbers relative to history. In
combination with the high percentage of hedge funds that remain well beneath their “high water marks”, an element of
performance chasing may come into play. Regardless, it is clear that the bulls can still point to the view that the worst of
the US economic uncertainty has now passed, that corporate profits remain generally strong and that equity valuation
levels remain attractive (especially versus other asset classes). Conversely, the bears can still point to elevated recession
risk in 2012, the unresolved European debt quagmire and the similarly unresolved US debt issues (with all eyes on the
Congressional super-committee’s 11/23 deadline).
Market data provided by FactSet Research Systems
S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock
market. An investment cannot be made directly in a market index.
NASDAQ Composite Index is a market-value-weighted index of all common stocks listed on NASDAQ. An investment
cannot be made directly in a market index.
Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York
Stock Exchange. An investment cannot be made directly in a market average.
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guarantee its accuracy or completeness. Past performance is no guarantee of future results.
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